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Platinum market surplus to fall by 47% in 2022 as demand continues to grow - WPIC

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(Kitco News) - Platinum investors should prepare for a year of volatility as the supply and demand outlook for 2022 remains solidly fluid, according to the World Platinum Investment Council (WPIC).

In its latest report on the platinum market, the council described the precious metal as having a complicated 2021 with strong demand but even stronger supply. The WPIC said that the platinum market saw a supply surplus of 1.232 million ounces last year, driven by the rapid process of stockpiled ore from 2020 and significant outflows of 237,000 ounces from platinum-backed exchange-traded funds.

The increase in supply came as platinum demand saw broad-based growth in 2021. The WPIC said that automotive demand last year increased 11%, industrial demand rose by 27% and jewelry demand increased by 5%.

Looking ahead, Trevor Raymond, director of research at the WPIC, said that the demand trends seen last year are expected to remain in place through 2022. He added that the platinum supply looks to be flat as most of the stockpile of platinum ore has now been processed.

For 2022, the council sees total demand rising by 7% to 520,000 ounces. However, the market is still expected to register another surplus, albeit down from 2021 level. This year platinum's surplus is expected to shrink by 47% to 652,000 ounces. Total

Raymond noted that while platinum's surplus is expected to remain elevated, there is still a lot of uncertainty in the marketplace, especially as the world continues to deal with Russia's war with Ukraine. He noted that Russia represents about 10% of the world's platinum supply.

"We don't know what will happen, but a 10% reduction in the platinum supply is not insignificant," he said. "Right now, everyone is scrambling to figure out what the impact is going to be."

Raymond added that the conflict could cause demand for platinum to rise as companies look to substitution for palladium. Russia controls about 40% of the palladium market. Both metals can be used in catalytic converters, reducing harmful emissions in gasoline-powered engines.

Palladium up 4% on geopolitical tensions, but platinum's move to 3-month high is attracting all the attention

The threat of Russia holding back palladium has caused prices to reach new record highs above $3,300 an ounce. Raymond said that the rising palladium prices make platinum an attractive substitute.

Raymond noted that despite the market's large surplus, there is a tightness in the market as lease rates remain for the physical precious metal remain elevated.

Raymond said that there is evidence China is buying unprecedented amounts of platinum, which would account for the perceived tightness and rising lease rates. He added that China's appetite for platinum in the physical market has not been captured in the latest data, which is one of the reasons for last year's massive surplus.

"Total net platinum imports into China exceeded its visible demand needs, with these 'excess' imports enough to absorb the full 1.2 Moz surplus in 2021. The ongoing tightness in the physical market and NYMEX stock drawdowns suggest that the trends that dominated 2021 are set to continue in 2022," analysts said in the latest quarterly report.

"Reports from on the ground in China suggest that a portion of the additional imports are due to market players within the platinum supply chain building speculative positions in physical metal, as seen in other commodities in the past. Importantly, the definition of 'demand' in our projections does not include speculative positions outside of bar and coin, ETFs and NYMEX stocks therefore, this demand from China is not captured in our published demand, hence the headline surplus," the report added.

In the current environment, he said that it wouldn't take much to turn this year's expected surplus into a deficit or at least a balanced market.

"If we start to see more aggressive substitution that could remove 200,000 to 400,000 ounces from the market. At the same time, a small uptick in investor interest and further supply disruptions could easily push the market into a deficit," he said. "There is this misconception in the market that platinum is readily available, but the supply is a lot more fragile than some would believe."

Green energy transition will continue to support platinum

Raymond said that the most significant long-term support for platinum remains the green energy transition. He added that the precious metal still has an important role to play in reducing harmful greenhouse gas emissions.

Some analysts speculate that rising oil prices could lead to a faster transition to electric vehicles. However, Raymond said that it's not just oil prices that consumers have to consider; commodity prices in general from nickel to lithium have pushed to record highs, which could lead to higher prices in EV markets.

He added that the cheaper option for automakers in the current environment would be to make more hybrid vehicles that have smaller batteries and still rely on combustion engines. Raymond added that these engines would still need platinum to reduce harmful emissions.

"Platinum remains the cheapest solution for decarbonization," Raymond said.

Another factor in the green energy transition is the growing popularity of green hydrogen, which needs platinum as a catalyst. Solar or wind energy separates hydrogen and oxygen molecules in water; the hydrogen is then used as fuel to power generators.

Higher energy prices could accelerate plans to develop hydrogen fuel cells, Raymond said.

"The world isn't quite there yet, but fuel cells are that much closer to being mainstream power sources," he said.

As to what is holding back platinum prices, Raymond said that the market needs an infusion of new capital. platinum has been one of the worst-performing assets in the precious metals sector. Its discount to gold continues to grow.

"The idea of a surplus is scaring some investors away from platinum, but there is more to the market than surpluses," he said. "Nobody is bothering to put any major money into the market," he said. "Someone needs to believe that platinum is generally undervalued. Once that happens, you will see prices start to move."

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